Sometimes, you’ll come into a bit of extra money. This could be from work, or the sale of an expensive object, or a gift. In these moments, it’s tempting to make an extra repayment on the loan you’ve taken out. However, some people don’t know if making an extra payment is a good idea or not. To try and help, we’re taking a look at some of the pros and cons of doing this.
So what are the advantages of early repayment?
To begin with, let’s look at why making some early repayments is a good idea. The first and most obvious point is that you’ll pay the loan back faster. This means you won’t have the worry of loan payments on your mind for as long. As well as this, you also don’t pay interest on anything you pay back early. The quicker it’s paid back, the less likely you are to run into issues. These can include things like more interest being put onto your loan or missing a payment. For most people, paying back a loan quickly seems like the most sensible option by far. Getting a loan paid back ends your business with the loan company.
Real life stories:
I was foolish to take out a bonus loan with this company [Oakam Loans] and have been paying them 45 pound per week for the last 10 weeks. There are another 42 weeks to pay and I am now in a position to repay early.
Phillyg – Consumer Action Group
But are there disadvantages to paying back a loan early?
There can, of course, be disadvantages to paying back a loan early. If you have a low APR loan, then it might be worth staying in the current payment plan. The biggest issue is when loan companies charge you more for paying early. This may seem strange, but it can be a genuine problem. Early repayment fees are typical when you try and pay everything back at once. At a basic level, people with personal loans need to pay to clear their debts early. While this may seem very odd, it is a way that loan companies make money. If you stick to your original plan, you’ll need to pay interest, which benefits the company.
When you make a significant overpayment, it’s called a ‘partial early settlement’. What this means is that you’re paying off more of your loan than your agreement states. If your loan is from after February of 2011, you can pay up to £8000 in overpayment. Anything after that will see you get charged a fee for paying early.
So is paying back early a good idea?
Overall, there are both pros and cons to paying back early. Obviously, the faster you can pay back your loan, the better. However, you need to be careful when paying early. You can be charged money if you try and pay back more than your agreement says. Therefore, you need to make sure you’re paying less than the amount stated in a year. This will protect you from fees, and you won’t have to pay interest. No one wants a loan hanging over their heads, so they want to pay back quickly. It’s just a question of making sure you do so in a way that doesn’t rack up more fees.